Rollins, Inc. 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates a single reportable segment focused on residential and commercial pest and termite control services. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company reported 218.2 million common shares outstanding as of July 16, 2018.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $480.5 million | $433.6 million | $889.2 million | $808.8 million |
| Income before taxes | $90.2 million | $86.1 million | $149.4 million | $143.4 million |
| Net income | $65.5 million | $53.7 million | $114.1 million | $94.0 million |
| Basic and diluted EPS | $0.30 | $0.25 | $0.52 | $0.43 |
| Operating cash flow | Not separately provided | Not separately provided | $130.5 million | $119.9 million |
- Second-quarter revenue increased 10.8%; six-month revenue increased 9.9%.
- Second-quarter net income increased 22.1%; six-month net income increased 21.4%.
- Calculated net margins were approximately 13.6% for the quarter and 12.8% year to date, compared with approximately 12.4% and 11.6%, respectively, in the prior-year periods.
- Second-quarter gross margin was 52.0%, down from 52.8%; six-month gross margin was 50.9%, down from 51.3%.
- Sales, general and administrative expense was 29.8% of quarterly revenue and 30.3% of six-month revenue, broadly consistent with the prior year.
- Cash and cash equivalents were $87.9 million at June 30, 2018, compared with $107.1 million at December 31, 2017.
- Total assets were $1.105 billion and total liabilities were $409.4 million at June 30, 2018.
- The company had no outstanding borrowings under its $175.0 million unsecured revolving credit facility. The facility includes $75.0 million of letter-of-credit capacity and $25.0 million of swingline capacity.
- Unearned revenue was $135.3 million at June 30, 2018, including $124.8 million classified as current.
Material Changes Versus the Prior Comparable Period
- Growth occurred across all service lines. For the quarter, commercial pest control revenue increased 6.0%, residential pest control increased 11.6%, and termite and ancillary services increased 16.0%.
- Management attributed approximately 5.4 percentage points of quarterly revenue growth to acquisitions and 5.4 percentage points to customer growth and pricing. For the first six months, acquisitions contributed approximately 4.4% of revenue growth.
- Cost of services increased faster than revenue, reflecting higher personnel costs, fuel prices, leased-vehicle expense, maintenance and repairs. Routing and scheduling technology partially offset these pressures.
- Depreciation and amortization increased 20.8% in the quarter and 21.8% year to date, primarily because of acquisitions, equipment purchases and amortization of acquired customer contracts.
- The effective tax rate declined to 27.3% in the quarter and 23.6% year to date, from 37.7% and 34.5%, respectively, primarily due to the 2017 Tax Cuts and Jobs Act.
- Cash used for acquisitions increased to $54.6 million from $6.2 million in the prior-year six-month period. The company completed 26 acquisitions during the first six months, including acquisitions in the United Kingdom, and acquired a Singapore operation on July 2, 2018.
- Capital expenditures increased to $14.2 million from $11.2 million for the first six months. Dividends paid increased to $61.1 million, or $0.28 per share, from $50.1 million, or $0.23 per share.
- The company adopted ASC 606 using the modified retrospective method on January 1, 2018. Management reported no material impact on the financial statements.
Guidance, Outlook, Risks and Unusual Items
- Management expects the 2018 corporate effective tax rate to be in the mid-20% range, subject to potential adjustments from Tax Act implementation, tax guidance and tax-return filings.
- Management expects approximately $15.0 million of capital expenditures during the remainder of 2018 and does not expect additional defined-benefit pension contributions in 2018.
- The pension plan is more than 100% funded, and the company has begun a 16-to-18-month process to transition the plan to an insurance provider.
- Management believes cash, operating cash flow and available borrowing capacity will fund operations, obligations and expansion for the foreseeable future. The company expects to maintain compliance with debt covenants through 2018.
- The board declared a regular quarterly dividend of $0.14 per share payable September 10, 2018.
- Pending lawsuits, employment claims and environmental matters are being contested. Management does not expect them to have a material adverse effect in aggregate, but an unfavorable outcome could materially affect an individual quarter or year.
- Key disclosed risks include acquisition integration, labor availability and costs, fuel prices, weather and climate conditions, competition and pricing, data security, regulatory and environmental requirements, foreign-exchange movements, brand and reputation risks, and pest-control treatment effectiveness.
- The company expects adoption of the lease standard, ASC 842, beginning in 2019 to materially increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities.
Important Facts for Investors to Verify
- Whether revenue growth and margin performance remain balanced as acquisition activity, employee benefits, fuel and vehicle costs increase.
- The contribution, valuation and integration results of the 26 first-half acquisitions and subsequent Singapore acquisition.
- The sustainability of the lower effective tax rate and any final Tax Act-related adjustments.
- Liquidity after acquisitions, dividends, capital expenditures and employee-related share repurchases, particularly given cash declined to $87.9 million.
- The timing, accounting effects and execution risks of the pension-plan insurance transition.
- The eventual balance-sheet impact of ASC 842 lease adoption.
- Potential exposure from litigation, environmental matters, foreign-exchange movements and other contingencies, for which the filing does not provide a clear quantified maximum loss.